Korea to relax short selling rules for retail investors

Financial authorities plan to ease trading conditions for retail short sellers while making it more challenging for institutional investors to engage in short selling.

People Power Party Rep. Yu Eui-dong, second from left, speaks in a meeting with financial regulators at the National Assembly in Yeouido, western Seoul on Thursday. They released an outline to improve systems for short selling in Korea. [NEWS1]

Financial authorities will ease trading conditions for retail short sellers and make such trades more challenging for institutional investors amid ongoing regulatory efforts to level their playing field.

Financial Services Commission (FSC) said on Thursday that it will restrict institutional investors’ holding period for short-sold stocks from an unlimited length to 90 days, which can be extended following a regulatory report to the Financial Supervisory Service (FSS). That's the same time period that retail short sellers are currently allowed.

The collateral ratio for retail investors’ short sale trades will be also slashed from the current 120 percent to the 105 percent that is currently applied to institutional traders. The change will allow retail investors to short more stocks with the same value of shares as collateral for the trades compared to existing regulations.

The outline of the systematic changes followed a meeting between the governing People Power Party (PPP) and financial regulators at the National Assembly in western Seoul.

“We’ve decided to fundamentally resolve the uneven playing field” for retail and institutional investors, said PPP Rep. Yu Eui-dong. “We’ve decided to create more favorable conditions for retail investors that realistically face more restrictions in short-sale trades than institutional investors.”

“We will extend the short selling ban if the systematic improvements don’t prove to be enough,” said FSC Vice Chairman Kim So-young.”

The regulators banned short selling earlier this month. The ban, which excludes market makers and liquidity providers, will extend through June. The announcement came after some global investment banks operating in the country committed naked short selling, which isn't allowed in Korea.

Naked short selling is the practice of shorting stocks without first borrowing them or determining that they can be borrowed.

The authorities also vowed to make it mandatory for institutional investors that conduct short selling trades to establish a computerized system for those trades and standards for internal control.

A total of 21 foreign and 78 local institutional investors have conducted short sale trades as of this year. Those entities accounted for 92 percent of total short selling trades.

“We expect to foster a fair and efficient capital market through an improvement of the short selling system for all types of investors to be able to trust,” said the FSC in a statement.

The short selling ban has been a highly controversial issue in Korea, especially ahead of the general election slated for April.

President Yoon Suk Yeol got himself involved in the matter, calling for a ban on short selling until “fundamental improvements” are made during a Cabinet meeting on Tuesday.

BY JIN MIN-JI [jin.minji@joongang.co.kr]